As part of the conservative party manifesto and in the run up to the elections earlier this year, the conservatives promised to increase the Inheritance Tax (IHT) threshold to £1 million for married couples and civil partners. The aim was to enable more individuals to pass on the family home tax-free following their death.

Therefore the Summer Budget on 8 July 2015, saw the government announce changes to IHT.

IHT Basics

• IHT is charged on a persons estate on their death and sometimes to gifts made during their lifetime. IHT becomes payable when the estate exceeds a certain value, known as the IHT threshold.
• IHT is charged on estates worth more than £325,000. Tax at 40% is applied against the value of assets above the IHT threshold.
• Assets below the IHT threshold (known as the nil rate band) are passed on tax-free to beneficiaries.
• The IHT threshold for the tax year 2015/16 is £325,000 per person. It has been at this level since 2010/11 and is set to remain until 2020/21.

IHT: Spouses and Civil Partners

When a person leaves everything they own to their surviving spouse or civil partner, their estate is transferred tax-free to the survivor irrespective of its value.

By law, this means the deceased spouse did not use their own nil rate band and under these circumstances, the proportion of their unused nil rate band can be transferred to the estate of the second spouse when they die.

The result is that the estate of the second spouse to die could benefit from a combined IHT threshold of £650,000.

Summer Budget Changes to IHT

The conservatives have increased the IHT threshold for spouses and civil partners through the introduction of the main residence nil rate band; an additional £175,000 IHT home allowance will be available for the marital home.

The allowance will be added to the existing IHT threshold of £325,000 and progressively introduced from April 2017 as follows:

• £100,000 in 2017/18
• Up to £125,000 in 2018/19
• £150,000 in 2019/20
• £175,000 in 2020/21.
• From 2021/22 onwards it will increase in line with the Consumer Price Index.

The allowance plus the IHT threshold of £325,000 will give some individuals a £500,000 IHT threshold on death and will provide a combined £1 million IHT threshold to spouses and civil partners. This will apply when passing on the family home to direct descendants (children, step-children, adopted or foster children) or lineal descendants following the death of the second spouse or civil partner that occurs after 6 April 2017.

This effectively means couples are able pass on a tax-free £350,000 home allowance to their children.

However, the allowance will be reduced for estates worth more than £2 million at a withdrawal rate of £1 for every £2 over that threshold.

Transferable Allowance

The main residence nil rate band is transferable where the second spouse or civil partner dies on or after 6 April 2017, in much the same way as the nil rate band is transferable between spouses.

Trusts involving the Home

It is not uncommon under a Will, for people to transfer their home or share of their home into a trust, for the benefit of their descendants rather than leaving it directly to them. However, the main residence nil rate band will not apply to all types of trust.

The allowance is available for descendants who have a qualifying life interest in the trust or are minors or are aged under 25. However it is not set to apply to discretionary trusts. Therefore if a discretionary trust has been used, the allowance may well be lost.

What to do next

Following the increase in the nil rate band, you should review your existing Will and testamentary arrangements to ensure your wishes will still be carried out. This is particularly the case where a nil rate band trust or legacy has been included in your Will.

For more information on Inheritance Tax or to find out how the changes to Inheritance Tax may affect you, please contact us on 0208 537 3448 or wills@ashtongrace.co.uk.

Ashton Grace – Specialists in Wills & Estate Planning